Why the United Kingdom must say 'No'
By Rt Hon. David Heathcoat-Amory, MP E-mail: david@wells.tory.org.uk

THE CASE FOR

The economic case for a single currency in Europe rests on claims that it will lower transaction costs for traders and travellers, that it is necessary to complete the Single Market, and that participants will acquire the mantle of a strong, inflation-free currency with a reputation inherited from the Deutschmark.

The European Commission has estimated that currency conversion costs amount to about 0.4% of EC GDP per year, although there is some suspicion that this calculation includes the cost of transferring the money to another country as well as the actual cost of converting to another currency.

In support of the burden of such costs the example is often quoted of a tourist setting off from one European Union (EU) country with £100, changing it into the currencies of successive Member States and arriving back with £50, the rest having gone in commission charges and differential exchange rates. In the era of plastic cards, it is unlikely that such dim tourists actually exist, but the image remains.

More important are the trading costs associated with variable exchange rates. These are sometimes exaggerated. Businesses concerned about these risks can in the market for foreign exchange futures with costs measured in hundredths of 1%. Many companies have internal treasury operations anyway.

Further it has never been demonstrated that exchange rate volatility inhibits trade in practice. It has not been the Japanese experience that the marked fluctuations of the yen relative to the dollar and the European currencies have been a serious barrier to Japan's ability to increase exports. Nor has the relative depreciation of the pound prevented the UK receiving about 40% of the American and Japanese direct investment in the EU. This indicates that even for investment, where exchange rate hedging is not a long term option, fixed exchange rates are less important than other factors such as costs, tax rates, labour relations, language and location. Also, the saving from a single currency must be set against the large costs of changeover. The British Retail Consortium estimates that converting to a single currency would cost retailers alone over £2 billion.

The case for a single currency on Single Market grounds is often overstated. The British Government actively promoted the 1992 Programme to remove all barriers and hindrances to trade. A single currency was not thought necessary for the project. The way to achieve further benefits from the Single Market is by strict enforcement of the rules and by extending the market in areas like energy and telecommunications.

It is sometimes suggested that the countries in a single European currency zone might put up trade barriers against a country like the UK, if it stayed outside. This would be contrary to the Treaty rules governing the Single Market. In any case, since most EU countries run a trade surplus with the UK it would be self-defeating for them to invite reciprocal action against their own exports.

There are many examples of free trade without single currencies. The United States, Canada and Mexico are bound together in a free trade area, NAFTA. This has no fixed exchange rates and no plans for a single currency. Trade is increasing even faster between the Asian Pacific countries without any agreed currency arrangements at all. Eight successive GATT rounds have progressively lowered tariff barriers worldwide and they are now a fraction of what they were when the European Community was founded in 1957. These moves towards global free trade will have more influence on future trade patterns than new single currency zones.

Given that over half of the UK's trade (visibles and invisibles together) is with countries outside the EU, the benefits from joining a single currency within Europe have to be balanced against the possibility that it could deliver the wrong exchange rate for trade outside the EU. A certain Euro exchange rate against the dollar, for instance, might be right for a majority of Member States but not suit British trading conditions. Trade with the United States could therefore suffer and since the UK does proportionately twice as much trade with the US than any other EU country, this would have serious consequences.

Arguments for a single European currency often rest finally on the hope that it will usher in permanently low inflation, which has been the expressed objective of British policy for some years. The benefits of low inflation are beyond dispute. Markets work more efficiently, the quality of savings and investment decisions improves, tax distortions are removed, and there is an end to the arbitrary and unfair redistribution of income which takes place through inflation.

It is also true that until recently the British record on inflation was poor, certainly compared with the anchor currency of Europe, the Deutschmark. The Treaty specifies that the primary objective of the European Central Bank (ECB) shall be price stability. The decisions of the ECB will be taken by the Governing Council, made up of the heads of participating central banks, all of whom will be fully independent. How tough the ECB will be is difficult to tell but it is fair to assume that it will want to adopt as much as possible of the Bundesbank's reputation for stability and prudence.

On the other hand each member of the Governing Council will have one vote and decisions will be by simple majority, so Germany will have no more formal rights than any other country. In fact part of the enthusiasm for monetary union in other Member States arises from a wish to end the de facto dominance of the Bundesbank and get a seat at the table where interest rate decisions are taken. The Treaty tries to ensure that the ECB decisions are free of political interference but it remains to be seen if its members will be as determined as the Bundesbank in sticking rigidly to the requirements of price stability. For example, the Labour Party recently called for the Council of Finance Ministers to be built up into a 'democratic counterpart' to influence the ECB.

The UK's success in getting inflation down and keeping it down shows the importance of political will and a commitment not to shirk unpopular decisions. Those who seek the external discipline of a single currency and an ECB sometimes talk as though it is a substitute for hard choices at home. This is an illusion. Sustainable growth, high employment and permanently low inflation require great determination on the part of government and self-discipline on the part of economic participants. This determination cannot be subcontracted to an ECB. A Single European Currency